How Important are Break Clauses in a Lease?

A break clause is a contractual provision that allows one of both parties the right to exit a lease agreement prematurely before the end of the fixed term. They are usually put into long contracts such as commercial property lease agreements with some conditions in place. The breaks or break notices tend to occur at more than one fixed point. For example, if you have a 5-year lease, you might have a break clause at 18 months and 3 years.

Life doesn’t always go to plan and running a business is often full of surprises – both good and bad! So, it helps that a contract can be a little more flexible should the need arise, for both the landlord and the tenant.

Considerations for Landlords

Landlords must carefully draft break clauses to ensure that they protect their interests. Ambiguous or poorly worded clauses can lead to misunderstandings and disputes. Seeking legal advice when drafting a lease agreement can help landlords to avoid potential pitfalls.

As a landlord you may query why you would want to allow a tenant to exit your property rather than lock them in place for 10 years, for example. However, a break clause does allow you to remove a troublesome tenant, expand your own business, take advantage of changes in the market, to sell the premises or help you if your personal circumstances change and you need to use, move or release funds from the commercial property.

There are often some conditions that you would want to impose on a tenant’s break clause, such as:

1. That the rent is paid up to date and funds are cleared before the break date
2. That the tenant gives up occupation and leaves behind no subleases
3. The tenant has performed all of its covenants
4. A notice period must be served if intending to use a break clause

Make sure that you are carefully and clearly setting out the notice period that you require for your tenant to use a break clause. This might be, for example, 6-months’ notice. But be very specific about the date and form in which you require the notice to be given to avoid any confusion.

Considerations for Tenants

Taking on a commercial lease can be a risk, so it is important to know that you are not over committing yourself. You will have no doubt conducted plenty of research and forecast your success to ensure that taking on the lease is a good idea – but there is always a sense of unknown when running a business. You may find business is booming and you need to move to a bigger premises, or the market may take a turn which results in you needing to downscale your staff or even close up shop altogether. Having a break clause allows you to exit at set points, without having to waste months or years of rent in an unused property. Or worse – needing to pay for two commercial units at once because you are tied!

If you do not have any breaks on the lease included in your agreement, then this is a crucial point to negotiate before signing on the dotted line. However, it is worth remembering that break clauses work in both directions, so your landlord can utilise the break points too.

Be aware of any stipulations that come with the break clause. You may be required to give notice that you wish to use the break notice. If you miss this deadline, then you could find yourself stuck until the next break point. Ensure that you read the small print.

Landlords will often require you to fully vacate by the date of the break clause. This might include all fixtures and fittings or any adaptations you have made to the building. Check the terms very carefully to avoid being penalised.

Tenants should stay up to date with their rent and service charges in any regard, but being behind on your rent could mean that your landlord refuses to allow the break clause.

When a Break Clause Saves the Day

One of the best examples of where a break clause was crucial for businesses, is probably in recent years where the Covid-19 pandemic and financial pressures led to many businesses working from home, scaling back operations or going into administration. Without a break clause, many of these businesses would have been tied into lengthy contracts on empty premises. In any downturn or crisis there are winners and losers, and many businesses thrived during the pandemic – those business were able to exit earlier to take on larger premises which helped them to take advantage of their market.

Commercial Property Lawyers in Basingstoke

If you are a commercial landlord or a business tenant considering offering or taking on a new lease and would like to negotiate a break clause or have your agreement reviewed by a legal expert, then please get in touch with our Commercial Property Team.

Call us on 01256 844888, email enquiries@lambbrooks.com or complete an enquiry form on our website. We also have an online chat assistant (a person not a robot) who monitors our website chat 24 hours a day, so if you are up at night stressing about your lease – there is someone to talk to.

We work with landlords and tenants of all shapes, sizes and sectors to make sure they are entering into sensible, flexible and well-worded agreements that are the best fit for their business.